Next Monday at 10am ET we will dive deep into each line of the P&L around what’s driven the success during the pandemic and what the risks are on reversion as the U.S. heads into recession.
Call Details
Date/Time: Monday, September 19th at 10am EDT Add To Calendar CLICK HERE
Live Video Link To Be Available Prior To Webcast
Below is the thesis summary when we added TGT to our Best Ideas Short list last week.
New Best Idea Short. Something just is not right here at Target. The company has a massive inventory problem, as do its competitors. To its credit, TGT cut guidance twice in three weeks this summer to be more offensive in clearing excess product. In effect, it’s given back nearly all of the margins gains that it won during the pandemic. Bulls think the company kitchen-sinked the guide, threw in the towel on margins, and only good news on the margin from here. But we have two problems with this story. 1) It gained $30BILLION in sales during the pandemic – off a base of $78bn. That is simply massive. To its credit, the company was in the right place at the right time with the right strategy that aligned with how the customer wanted to shop. But these massive and compressed market share gains are unlike anything we’re ever seen for such a ‘stable’ big box retailer in decades. That leads us to problem #2. The Street is following TGT’s guide on margins for the next quarter – sort of. But the ramp in EPS growth and positive rate of change is very difficult to stomach. EPS was down 89% in the latest quarter. Street has that sequentially improving to -29% in 3Q, and then +4% in 4! To cap it off, the consensus is looking for 47% growth next year. 47%!!! To be abundantly clear, there is no reason why the top line can't be down next year. We’ll be going through 4 Quad4s – and I don’t think Cornell (CEO) gets this, while as he plans the longer term CEO transition. And as stated above -- industry EBIT growth expectations for 2023 as being way too high – both sales and margins – TGT is sitting right in the bullseye of competitive pressure from the 80-90% of retailers that will be aggressively clearing product. Bottom line is that going from ~$8 this year to $12 next year in EPS is a herculean feat that we don’t think TGT will pull off. Not hugely expensive at 10x EBITDA, but what’s the real EBITDA rate? That’s the part of the equation that the market has wrong. No reason why TGT can’t revisit $100-$120 vs current $165 – a big return on a beta-adjusted basis for a big cap ‘stable’ name like target. This is one of the few times where we should see a meaningful price divergence between TGT (lower) and WMT (which our Staples team Biolsi/Penney have as a Best Idea Long).
